Stride Inc (LRN) 2015 Q2 法說會逐字稿

Greetings and welcome to the K12 fiscal 2015 second-quarter earnings call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mike Kraft. Thank you. You may begin.

Thank you and good morning. Welcome to K12's second-quarter earnings conference call.

Before we begin, I would like to remind you that in addition to historical information, certain comments made during this conference may be considered forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and should be considered in conjunction with cautionary statements contained in our earnings release and the Company's periodic filings with the SEC.

Forward-looking statements involve risks and uncertainties that may cause actual performance or results to differ materially from those expressed or implied by such statements. In addition, this conference call contains time-sensitive information that reflects management's best analysis only as of the day of this live call. K12 does not undertake any obligation to publicly update or revise any forward-looking statements.

For further information concerning risks and uncertainties that could materially affect financial and operational performance and results, please refer to our reports filed with the SEC, including without limitation cautionary statements made in K12's 2014 annual report on Form 10-K. These filings can be found on the investor relations section of our website at www.K12.com.

In addition to disclosing financial results in accordance with generally accepted accounting principles in the US, or GAAP, we will discuss certain information that is considered non-GAAP financial information. A reconciliation of this non-GAAP financial information to the most closely comparable GAAP information was included on our earnings release and is also posted on our website.

This call is open to the public and is being webcast. The call will be available for replay for 30 days.

With me on today's call is Nate Davis, Chief Executive Officer and Chairman; Tim Murray, President and Chief Operating Officer; and James Rhyu, Chief Financial Officer.

Following our prepared remarks, we will answer any question you may have. I would like to now turn the call over to Nate. Nate?

Good morning and thanks for joining us on the call today.

First, let me start by highlighting a few results for the quarter. Revenue was $231.1 million, up 3.3% year over year and within the range of our most recent guidance. Now excluding the businesses we sold last year, revenue rose 5.5% versus last year. Revenue growth was largely driven by gains in our managed and nonmanaged public school programs, as well as in our international and private-pay schools.

For the quarter, we posted operating income of $20.5 million, compared to an operating loss of $8.9 million in the prior year. James will review how this significant increase in operating income is impacted by businesses we sold last year and charges we recorded last year.

Today, I want to touch on two topics I'm very excited about. Both will impact our growth going forward. First, our business development for managed public schools is good news. Second, the revenue growth trends we are seeing in our institutional group, FuelEd, are now coming in as we planned.

From a school-development point of view, we're working with various school boards to open new schools in both new states that don't yet offer a virtual school option and new schools in states where we already operate at least one school.

For instance, the Maine Charter School Commission voted 6 to 1 to approve the charter application of the Maine Virtual Academy. The school initially serves students in grades seven through nine, with a plan to expand up to grade 12. The Maine Virtual Academy Board hopes to enroll about 300 students in the 2015-2016 school year and to grow from there.

In North Carolina, we continue to support our independent not-for-profit partner, the NC Learns Board, as they work with policymakers and the state Board of Education on their application to open a statewide online public charter school for the upcoming year. The final decision whether to move forward in North Carolina is anticipated in early February. If approved, the school could enroll up to 1,500 students in the upcoming school year and increase this to about 3,000 students by the fourth year of operation.

We are also supporting our school district partner Union County Public Schools as together we work to extend the Virtual Academy in Tennessee. Tennessee's Virtual Public Schools Act sunsets in June of this year, but with new legislation, the state legislature will determine the future of all online schools in the state, including the Tennessee Virtual Academy and seven other programs. These programs support over 1,500 students across the state.

With the potential of new legislation, the Union County Public Schools could extend the Tennessee Virtual Academy to more families all across Tennessee. Keep in mind that the school had a significant number of student applications that it was unable to fulfill last enrollment season.

Our work at the state level doesn't stop there. We're also working with a number of new partners in other new states for both regional and statewide programs, and I can't exactly tell you which new laws will be passed nor when new applications will be filed and approved, but the message is I want you to know that we are working with partners to expand school choice and provide more quality digital education alternatives in more states.

At the same time, our school development teams are also working on expansion of schools within our existing current state footprint. Each one of these planned schools or programs is at a different stage of development. In Colorado, for instance, a charter proposal for a new school has moved beyond a local Board of Cooperative Education Services, which is the school sponsor, and is now being reviewed at the state level.

In Minnesota, a blended charter school, which was actually approved in 2014, should open this fall.

All of our school development projects can be categorized into three groups. First, there are some states where we see strong ongoing demand and our existing school can't support the growth. Now that may be because the existing school partner wants their school to remain at a certain size or there may be enrollment caps at the school level. But a way to grow these states is to open additional schools.

Second, we are seeing demand for specific types of offerings. For example, we are seeing great interest in college and career readiness offerings, which allows students to pursue a distinct career path based on a national career cluster model. These specialty programs or schools have enormous potential, as they provide quality education for children who may not otherwise be able to obtain one and they can significantly add to the skilled trade workforce in this country. You'll see us open new programs and even new schools focused on career readiness and trade school preparation.

Lastly, there are states which require us to serve students on a county-by-county basis. Therefore, the only way to serve more students is to open up more counties.

For example, in Florida, today our charter school partnerships serve only eight out of 67 counties across the state. We estimate that we need to expand in about 12 to 15 schools in order to serve 90% of the students in that state, so this expansion will start in school year 2016-2017.

The key takeaway I want to leave you with is that there is significant school development work occurring at both the state level and the school level. You should expect to hear more from us on this front in the coming months. I believe these efforts, in conjunction with our efforts to expand enrollment in our existing partner schools, will support long-term growth in the managed public schools business.

Now before I move on to talk a little bit about our institutional group, FuelEd, I want to remind everyone that it's National School Choice Week, and throughout the week, over 11,000 events highlighting the importance of school choice will take place in the United States. These events also have a positive effect on a family's interest in K12 partner programs, as they raise awareness about the benefits of providing education options and empowering parents with the choice to go to different schools and get different choices.

Now onto FuelEd. This quarter, nonmanaged program revenue increased almost 65%, but as we have noted in the past, you should be aware that some of these gains were due to managed programs in Colorado, Kansas, and Hawaii transitioning to nonmanaged programs. But if you exclude the reclassification of these schools, year-over-year revenue growth was 39%.

In addition to that, our institutional and software and services revenue grew over 8%, and when combined with performance in nonmanaged programs, the institutional business, when we exclude the impact of Colorado, Kansas, and Hawaii and we exclude the impact of the sold businesses, is delivering almost 25% growth year over year.

By any measure, this is a dramatic turnaround because you have to keep in mind, just a year ago we were seeing year-over-year declines in revenue in this segment. As we said we would, we have focused on this business, expanded our capabilities, and are beginning to see the results of our investments.

There are a number of underlying trends that support this growth. One is state funding. More states are enabling funding sources, that were traditionally allocated for textbook and print materials, to be used for the purchase of digital content, including online courses. In Florida, for example, the current textbook adoption process is now allowing for funding to be used on digital materials for French and for Spanish.

Another reason for our growth is that more states are enabling and mandating access to online courses. Michigan is one of the best-known examples. The state requires students to have at least one online learning course in order to graduate. The state also provides students in grades six through 12 the ability to enroll in online courses through Michigan's online course catalog.

Now for FuelEd, this has translated into student growth of 20% year over year.

More recently, Louisiana has developed its Supplemental Course Academy to offer online courses. This has increased the demand for online learning in the state for FuelEd single-course options, as well as its full-time programs. The result is that FuelEd will more than double its annual revenue from the state of Louisiana in the current fiscal year.

School districts are also expanding digital learning for a variety of reasons and re-envisioning the traditional classroom to a blended or hybrid model. Districts are using digital content to supplement the classroom instruction for students requiring credit recovery and for advanced learners requiring advanced placement courses. They are also addressing their homebound population using digital curriculum, something very difficult to do with traditional textbook methods.

More district teachers are embracing online learning every day. FuelEd saw a significant increase in school partners delivering online instruction using their own teachers. Historically, we, FuelEd, provided instructional services via state certified subject matter expert teachers to the majority of our partners. And while demand for those services continues to grow in terms of absolute number of students taught by our own teachers, students taught by district employee teachers more than doubled year over year.

Today, about half the courses purchased are taught by a public school district teacher. This means schools are beginning to accept online learning as a mainstream curricular programming solution.

Fundamentally, this also means districts and their teachers are using online courses to replace textbooks and other content historically utilized in the classroom.

In this environment, FuelEd is being successful for a number of reasons, and I would like all of our investors to understand the significant transition we are making from simply a school operator to a company that also significantly markets opportunities in software and services to many public and private school districts in the US.

First, FuelEd offers the industry's largest digital catalog that is aligned to national and state standards. Importantly, courses span all grades and most subjects. Uniquely, we offer kindergarten through fifth grade curriculum, which isn't offered by many other digital providers. Many digital providers offer content at the high school level only.

Additionally, the breadth of our world languages catalog is a real differentiator. For instance, this quarter we saw growth in Maryland and New Jersey for over 40 elementary schools, due to our world language capabilities. FuelEd's ability to offer world languages for lower grades helped close these deals.

Second, FuelEd offers a differentiated toolset with PEAK and PEAK Library, branded products of ours. With PEAK, school needs are consolidated into a single user experience. Think of PEAK as an aggregator, allowing districts to combine multiple independent solutions into a unified experience for teachers, students, administrators, and parents. Schools can enroll and activate students. They can assign courses and teachers, and then manage the learning experience with easy-to-use reporting and analytics on student progress.

With PEAK Library, where our content itself is contained, teachers can build and modify assignments and assessments and courses. They can augment the classroom instruction and develop lessons for sharing across the school district. Through this tool, they have access to open education resources, like Khan Academy, YouTube Education, paid content from FuelEd and its partners, and content pulled from a variety of sources, like news sites, museum sites, and just general information from the Internet.

The combination of these tools provides educators with a way to easily modify, create, and curate content to personalize the instruction for a class or a student, much like we've been doing in the managed public schools.

PEAK and PEAK Library have not only been responsible for closing sales, but once schools have access to these tools, they tend to expand the use cases for FuelEd within school districts, and ultimately, they grow their services and revenues with us. Key volume metrics, like enrollment and account revenue, have increased significantly via PEAK this year.

Going forward, I believe we will continue to see double-digit gains from the FuelEd business this year. Industry trends here are a tailwind for this business. Teachers are increasingly open to the blended model. FuelEd is already well positioned to support this transition.

So I hope you can see why I'm excited about K12's future growth prospects. I am particularly excited about the fact that gross margins are better in this segment and our business will grow more and will help provide a better economic efficiency in our business as we sell more in this segment.

Look for updates and announcements in the coming months and quarters on both our business development for managed public schools and FuelEd-related activities.

Thank you so much for your time this morning, and now I will hand the call over to our CFO, James Rhyu. James?

Thank you, Nate, and good morning, everybody.

I want to remind everybody that we took a charge in Q2 of last year of $32 million and we divested some businesses in Q4 of last year. So I will first take you through some actual reported results, then focus some time on pro forma results, so that you have a more meaningful basis of comparison of the underlying business.

As a reminder, we have provided tables in the earnings release that lay out the quarterly trends from last year in our new format and excluding the sold businesses.

First, a few words on our reported results. We ended the quarter with revenue of $231.3 million, up 3.3% from the year-ago quarter. Operating income was $20.5 million, compared to a loss of $8.9 million in the second quarter of last year, and enrollments rose 0.9% from the year-ago quarter, with nonmanaged program growth of 41.3% offsetting a 3.9% decline in managed programs.

Now I will turn to the pro forma results, excluding the impact of the $32 million charge in Q2 and the sold businesses. For the quarter, reported revenues of $231.3 million I mentioned, and that represents 5.5% increase over the pro forma Q2 2014 revenue of $219.2 million.

We saw growth in all segments of our business. Revenue from public school programs rose 4.2% year over year, while enrollments rose 0.9%. You should note that we made some immaterial reclassifications for enrollments and revenues for the non-managed programs and institutional software and services for fiscal-year 2014, and once again, we have provided all the quarter-by-quarter detail in the appendices of today's release.

Managed program revenue rose 2% year over year. This was in contrast to enrollment decline of 3.9% on a year-over-year basis. The increase in revenues resulted from a 6.1% improvement in revenue per enrollment relating to a combination of factors, including school mix, timing and improvement in funding in some states, activity-specific funding, and other variables.

We expect the generally positive rate environment to continue throughout the year, largely offsetting the enrollment declines.

Nonmanaged program revenue rose 64.8% to $11.4 million. At the same time, non-managed program enrollments rose 41.3% and revenue per enrollment rose 16.7%.

While enrollments and revenue per enrollment will fluctuate on a quarterly basis due to school mix, seasonality, and a variety of other factors, we would expect solid double-digit gains in non-managed programs on a full-year basis.

Institutional software and services, which includes course software, technology, professional, and other educational services sold by our FuelEd team, posted revenues of $11.8 million for the quarter. This is an increase of $0.9 million or 8.4% on a year-over-year basis.

As Nate mentioned, we have said that our Fuel business would begin to grow again at double-digit rates and the growth in institutional software and services, together with the growth in non-managed programs, excluding the impact of the states Nate mentioned, both of which serve our FuelEd business, demonstrated that in this quarter.

Our international and private-pay schools, revenue rose $2.9 million or 35.1% on a year-over-year basis. This increase was due to the continued strong performance at our Keystone and iCademy private schools, as well as the addition of a new school, the Queen Elizabeth Academy in the UK.

Gross margins declined from 39.6% last year to 37.3% in the current period. We have been consistently telling you that we plan to continue to invest in academic programs, and that proved out in this quarter, compressing margins.

In addition to that, some of our revenue gains this quarter related to new schools, including the Hill House blended school in Pittsburgh and the aforementioned Queen Elizabeth Academy in the UK. These schools have negligible margins in the early years of operations.

Selling, administrative, and other expenses increased $2.1 million or 3.5% year over year to $62.6 million. Product development expenses for the quarter were $3.2 million, which was flat on a year-over-year basis.

Operating income for the quarter was $20.5 million, and on a pro forma basis, this represents a decrease of $2.6 million or 11.3% year over year.

Turning to some other items, we ended the quarter with cash and cash equivalents of $124.2 million, a decrease of $38.7 million from the prior year, which was largely the result of the $7 million stock repurchase program we completed in September 2014.

We ended the quarter with Accounts Receivable of $266.8 million, largely the same as our balance at the end of the second quarter in the prior year, and DSOs remained largely in line with last year as well.

While we are on the topic of cash and Accounts Receivable, I want to spend a minute discussing our balance sheet relative to our current valuation. We have had net working capital of over $300 million for the past nine quarters. Most of this is attributable to the cash and AR balances I just referenced. That translates into approximately $7 to $8 a share. It also generally builds from Q1 to Q4, excluding the impact of the share repurchase program last year.

That implies an underlying -- that our underlying business is trading at approximately $4 a share or about 1.5 to 2 times EBITDA. Now you can determine if that's a fair valuation or not, but I wanted to make sure I laid it out for everybody.

Continuing on to CapEx, as we have historically defined it, which includes curriculum and software development, computers, and infrastructure, it was $15 million in the quarter. This represents a $2.4 million decrease from last year, which was a result of higher spending on some capitalized software projects, offset by some lower expenditures on student computers.

Our tax rate for the quarter was 42%, which was largely the same as the adjusted rate for the second quarter of the prior year. Our guidance for the full fiscal year of 2015 remains the same, in the range of 38% to 40%.

Turning to our expectations for the third quarter, we expect revenue of $230 million to $240 million, operating income of between $20 million and $24 million, and capital expenditures of between $18 million and $22 million.

Thank you for your time today and now I will hand the call back over to Nate.

Thank you, James. I believe that we are ready for Q&A. If we have got any questions, Operator, Kevin, we are ready for questions.

(Operator Instructions). Jeff Meuler, Robert W. Baird.

Thanks for all the detail, Nate, on the business development activity. Glad to hear that is going better recently.

I guess, can you help us understand? Are the states and the school boards and everybody that you have to deal with, are they recognizing all of the investment that you guys, this current management team, has been putting into academics, improving academic outcomes, systems? Is that what is driving the improved business development environment, or if not, what is?

Good morning, Jeff. The answer is, obviously, it's across the board. It's different depending on the state that you are in. Some states, we have been working on for a long time, like Maine. Maine has been something we have been working on for a long time.

Tennessee is a reverse situation. I think in Tennessee there is some recognition of the progress that has been made, so while Maine has been a long-standing story, Tennessee has really been more about the last 12 months of them understanding who we are and the changes we have made and the progress we are making.

Yes, people are beginning to recognize that. Even in the places that I didn't talk about, boards that -- who may have been concerned a year ago, two years ago, are now saying to us we like your change, we like what you're doing, and thank you. So we are getting some recognition for it and we are pretty pleased about that.

Okay, good to hear. Then I hear you guys on the working capital or the tangible book value, but can you maybe talk about as the business transitions to -- or as you grow your FuelEd, the institutional business, what are the working capital requirements of that business?

Jeff, it's James. I think what we see is, and just referencing Nate's comments, we do think that the managed public school business still shows some growth going forward.

Obviously, that is going to continue to be, just given the relative sizes, a large part of what is driving our working capital. So I don't think the dynamics of our working capital on the balance sheet are actually going to change dramatically over the next couple years.

However, the dynamic that the FuelEd business will drive a slight change in over time would be the way that we sell those services. Some of them will drive greater deferred revenue on the balance sheet and more cash up front, so working capital wise, it offsets in the period in which you sell that business and then they both attrite down over the course of the year.

To the extent that there is margin built into that, obviously the deferred revenue weans off over the course of the year and we keep more of that cash, so you have some slight working capital pickup, but I don't think it's really going to be material over the coming couple years.

Okay, and then just finally, maybe an update on the systems investment and transitions, and now that you have stepped up your pace of investment spend, is this year's spend level roughly the right level to work off of going forward?

Jeff, it's Tim. First of all, yes, the current spend level, we think, is appropriate. We are seeing the benefits in terms of better efficiencies for our schools. We expect over time those spend levels will come down modestly. James, I don't know if you want to add anything to that in terms of the current expectations going forward.

I would -- this is Nate speaking -- think about it this way. Our Desire 2 Learn implementation comes in -- we are in the pilots right now.

We will turn up the high school experience in September. We have a decision to make as to whether we roll it down to the grade-school level the following year. Work that we are doing on all of the content, we should then expect to see in the next 18, 24 months CapEx start to come down.

We're also doing a number of things in the area of the kinds of computers we buy and the use of our content that will be more mobile, so it will be on tablet devices as well. So I expect to see the cost of computers in the next couple years come down.

So I expect to see that over the next probably 24-month period, you will start to see CapEx dip down. Right now, we're in a high CapEx period because of the investments we are making primarily in that new high school platform.

Okay, thank you, gentlemen.

Corey Greendale, First Analysis.

This is Tom Bakas on for Corey. Just noticing there is a pretty wide range of estimates for fiscal 2016. I suspect it has a lot to do with the questions over the Agora impact. I know you've discussed it in broad terms, but I think it might be helpful to discuss more specifically, just to help set expectations.

Tom, it's James. I think there's a lot of variance out there. I agree with you in the estimates for next year.

I think if you actually -- the easy way, I think, is if you look at the consensus, I think the consensus has the impacts modeled in about right, so unless you want me to, I wasn't going to spend a lot of time detailing out what I think was detailed out in the past couple quarters, but I think the consensus is factoring in the Agora impact next year appropriately.

Does that help or do you want me to go into a little more detail than that?

It's really up to you. If you are not really wanting to at this point, that's totally okay.

I think -- so just to be, maybe just to be safe, I will go into a little bit of detail. If you remember, Agora is about $120 million or $130 million of revenue. About half of that is no-margin revenue and all of that no-margin revenue is going away.

The remaining half, about half of that we won the business for, which is the highest margin business. However -- so three-quarters of the revenue, approximately, will go away. However, of the operating income, the operating income that we retain on the higher-margin business, so of the 25% that is retained, is a fairly high margin. However, having said that, we do lose some margin business on the Agora contract.

Obviously, we are not going to go into all the details of exactly how much we gain or lose, and we are still, in fact, internally working through how we make sure that we adjust our cost structure for the impact of Agora, so we don't have any real guidance out there. But that directionally tells you, I think, where we have talked previously about the Agora contract and how it would impact next year.

Tom, this is Nate speaking. I am going to add one more piece of information for you, which I hope doesn't confuse you, but it's important to understand, and that is when we talk about the high-margin business, primarily we are talking about the curriculum.

They're still going to use the K12 curriculum and that is the highest-margin business we have. However, you have to remember that is dependent upon the number of students and we simply don't know the number of students. Now if Agora maintains the number of students they have times our rate in our curriculum, then we don't lose as much money.

If Agora shrinks its school, which they may well decide to do -- we are no longer the manager, so we don't know what they're going to do. But if they were to shrink the school, then we would see additional shrinkage in revenue. That's why James is hesitant to give you a specific number and is more giving you a range because it is dependent upon their enrollments next year, which they may or may not shrink.

Okay, terrific. That's very helpful.

Trace Urdan, Wells Fargo.

Thanks. I am afraid my questions are going to be rather mundane. James, I am trying to decipher all of the various restatements and tables here. In your prepared remarks, you seemed to suggest that the $231.304 million number was the number that excludes -- that comparison -- the $231.304 million versus the $223.9 million is the number that excludes the write-offs, includes the restatements, and excludes the sold businesses. Is that correct?

Sorry, the 231 is the 231. If you look in the table in the back, you'll see --

There are a lot of tables in the back. Can you just speak in terms of the numbers, rather?

The number four in the back that has the revenue for Q2 fiscal-year 2014 that's comparable is $219.154 million. It is on page 13 of the release.

Okay, so that -- the $219.154 million and everything that comes above it, that's the apples-to-apples comparison with the business as it is constituted today?

Correct.

That is the 8% growth in the institutional business that Nate referred to?

Correct.

Okay, thank you.

Jeff Silber, BMO Capital Markets.

This is Henry Chien calling in for Jeff. I had a question. I think last call, you mentioned there were a few schools that may be up for some kind of contract renewal or charter renewal. I was wondering if you could give any color on if there is any developments there or any expectations on if any of these schools are transitioning to more of a curriculum-type contract or any color around there. Thanks.

There are no schools that we know of that are transitioning, other than the ones we have already announced, and obviously Hawaii and Colorado already made their decision, and so did Agora.

But of the other schools that we are under negotiation with, none of them have made the decision and none of them have communicated to us that they are considering that decision, so we don't believe that there is going to be any movement beyond the ones that we have already announced. We think that the ones that are announced, we have a good relationship with and we are in negotiations and the contracts are moving along.

So I don't see any move from managed to nonmanaged from those current negotiations. Jim, do you know of any that I don't know of?

Now, I think -- I would characterize all of those discussions and negotiations as being very positive, constructive, and moving forward. We feel very good about them.

Great. From the FuelEd perspective, a lot of publishers are seeing some pretty strong sales from their digital products as well. Could you expand upon where FuelEd has more of a, say, competitive advantage against some of the big publishers when you go through the adoption process, which you alluded to earlier?

Sure, sure. But let me note that for the most part, we are not directly competing against the very large basal curriculum publishers. The category of competitors that we are competing against are all typically in either the direct credit, supplemental credit, or credit recovery market.

We think our advantages come in four areas and Nate touched on all of them in his remarks. One, very broad curriculum and content library. Nate referred to it as the PEAK Library. We have the largest catalog in the industry.

Second, we've got a full range of solutions. You could come to us and buy everything from courses to original credit, to credit recovery, to part-time programs, to full-time programs where you can earn a diploma.

Third, the PEAK platform that Nate mentioned is really simplifying the complexity that our customers are confronted with as they deal with more and more vendors' solutions in the digital domain.

Take those three things, coupled with a great team on the field, and we feel very good about our competitive position.

I would add to Tim's comments, because I think he is 100% right. Number one, remember that we can go down in a grade-school level with our online curriculum and most people cannot.

They offer -- they focused on high school, a little bit at the middle-school level. Almost nobody offers online courses at the lower level, and it's because we have done it in the managed public schools. We know how to do with what we call a learning coach, so we can teach that.

Second, we offer teachers. Most people who sell their supplemental content give it to a school and say here it is, go use it. We say here it is, but by the way, we will have a teacher accompanying the content, so if you don't know how to teach online, we will provide teachers to do that. That's our second advantage.

The third advantage that I talk about would be the Middlebury languages. We offer world languages at all levels and that world language capability is something that many schools are looking for.

The last one I will talk about is not something that we actually are doing today, but something that I think will be an advantage for us going forward, and that is not only will it be world languages, but helping, as the Obama administration is pushing everyone to do, helping with English-language learning. So we have some things that we are going to do there as well.

All of those, I think, are advantages for us that put us ahead of competitors. Hope that helps.

Yes, that helps. Got it. Thanks for the comments.

Jerry Herman, Stifel.

James, I was just hoping that you would maybe revisit the comment about consensus, and I just want to be clear because it looks right now like the consensus for this year is $0.63 and the consensus for next year is around $0.43, which would suggest that the impact of Agora, if the numbers play out, would be about that $0.20 differential. Is that the way we should think about that?

Yes, and I think, again just echoing Nate's comments, the Agora impact is very difficult to gauge as we sit today because of the enrollment factor. But on a like-for-like basis, that is a range -- that type of range, we think, is pretty appropriate.

Great, thanks. And Nate, appreciate the comments on business development and your earlier commentary about contract flow. Is it too early to get any read on Ohio?

It is, but let me give you some color because I don't want to get ahead of the negotiation and ahead of the board and upset anybody, but I will give you some color.

I met with them on January 12. I met with the entire board. I have met now a couple times with the chairman of the board. Our head of school has a really good relationship with the board.

We are working together on the things that the board is concerned about, so I don't believe the board is concerned about K12. They are more concerned about a couple of other topics that relate to the way the schools are measured in Ohio and the way data and information is tracked about students in Ohio, so their concerns don't appear to be with K12.

I feel pretty good that the Ohio board and K12 have a great relationship. We are working well together and that I personally know the board chair.

Unlike -- I know you guys are -- I'm going to be probably more candid than somebody might want me to be, but I am just going to do it. I know you guys would be worried, well, how did Agora happen and why wouldn't that happen in Ohio? In Agora, we had not as good a relationship and they did not spend their time trying to understand K12.

The Ohio board has done the opposite. They have spent time with us. They have looked at our curriculum. They have come to visit our location. They love our head of school, so it's a completely different situation, so I feel very good about the Ohio situation. I hope that helps, Jerry.

It does, thanks. Tim, a question for you with regard to FuelEd. Have you guys effectively lapped the transition from the license model to the subscription model? And then, consistent with that, how do you think or how should we think about OI margins, operating margins, in that business? Not to belabor the question, but maybe some commentary about your sales and distribution there, as well, as a potential lever.

I will tag-team this with James. As you have heard us talk over the last six or eight quarters, we have steadily been declining the license mix that was attributable to perpetual licenses and that is now a nominal part of our business. So the short answer to your question is, yes, I think that is largely behind us. It is single-digit percentage of our revenue.

The quality of our revenue has gotten much better as we now see greater than 50% of our revenue in annual licenses. We see higher growth in our annual license and our per-enrollment license type. So we feel good about the quality of the revenue there.

In terms of sales, we continue to invest in our sales and distribution model. We just had, in fact, our sales team in for four days of sales training just last week. We have extended that training into our resale channel as well, extended additional tools to some of our resellers to help them to be able to sell more effectively.

So all in all, we have managed to improve our expense-to-revenue ratio from a sales perspective, achieving greater efficiencies in our sales expense, and we will continue to do that.

James, do you want to comment on the operating income margin?

Yes, I think the only thing I would say is I think we thought about this business at scale as being a pretty significant margin business. We talked about how we think of it as a combination software/service business. As Nate mentioned in his comments, there is a significant service component to it, which includes predominantly teacher services and that structurally has a lower margin.

The way we define scale is $100 million plus, and so I don't think that right now we are at scale, and I don't think that you should think of our business at this size as having a margin that is materially accretive or dilutive to our overall business margins.

Great, thanks.

Hopefully, that helps.

Let me just ask one more question, if I may, sorry. Use of cash, and in particular I think about the expansion of the portfolio in the software business, but likewise, with the stock trading below book value, how you guys think about the relative investment opportunities?

Jerry, this is Nate speaking. This is something we talk about at the Board level probably every quarter. We have a conversation about what is the right place to put your money. Is it putting it back to investors directly in the form of dividends and share repurchases or do you put it into core business investments?

And core business investment doesn't just mean more teachers and more curriculum; it means new product development as well. Then, of course, we look at acquisitions.

I think there are a number of small acquisitions on the marketplace that we will do. Can't announce a specific one, so don't hold me to the specific one, but I can tell you that we are actively looking at ones. They expand the business, especially the FuelEd business, and we're also looking at some new product ideas. You might imagine, because we have talked about this before, the new product ideas would be in the career readiness area, in English-language learning. That's the place where we think it's smart to spend money.

Right now, the Board keeps concluding that it doesn't make sense to go and do another share buyback program, above the $75 million we already did, because these other opportunities are there and they should grow shareholder value more directly. That's the current thinking.

Great. Thanks for your patience, guys.

We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Management does not have any additional comments. I just want to again thank everyone for taking the time this morning to be on our call, and hopefully you see our results are within the guidance we gave and we intend to do that again next quarter, and I look forward to talking to again. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.